I promised I would do a piece on what I think is really good about reform of the EU Savings Tax Directive, as announced by the European commission on 13 November.

In essence the key change is a simple one but extraordinarily important. The directive that was introduced on the 1 July 2005 was exceptionally easy to avoid because it only applied to payments to individuals. As a result anybody who transferred the sums they held on deposit into either a company or trust immediately avoided the disclosure or tax withholding obligations that the Directive created. As a consequence we know that some Swiss banks were bulk buying up to 10,000 Panama companies at a time, for example. Unsurprisingly less information was exchanged than expected and yields were lower than expected.

The Commission is proposing to change all that. Under the proposed reforms legal entities (that is companies, corporations, limited liability partnerships, foundations and the like) all come within the scope of the EU STD, as do what are called ‘arrangements’ -which is a euphemism for all forms of trusts.

The practical consequence is this. If payment is made to a legal entity or arrangement within an EU country which is not taxed upon the receipt of interest then it is deemed to be a ‘paying agent on receipt’ with regards to its beneficial owners and has to either exchange information on the receipt with the country in which they are resident or account for tax at the withholding rate at the time of receipt if they are located in one of the European countries where withholding applies. This has the impact of making all trusts within Europe taxable on interest income. It also make sure that foreign investment income of legal entities is subject to tax within Europe.

For those 15 places that are covered by EU STD but which are outside the European Union, most of which a British Crown Dependencies and Overseas Territories, the impact is even more radical. In these locations the paying agent of the interest, which will normally mean the bank making payment, is required to ‘ look through’ the company, corporation, foundation or trust that is recorded as the legal owner of the account to which the interest is paid and treat the interest as having been paid to the beneficial owner of that organisation using information held on their files for anti-money-laundering purposes to identify the real human person who benefits from the artificial structure created in the tax haven location.

Of course there are some minor issues that arise as a result, for example with regard to discretionary trusts, where the settlor is quite reasonably deemed to be the beneficial owner during their lifetime, but where complications arise after they have died, but these are relatively minor. And the important message is blunt, direct and clearly comprehensible, and it is that the European Union is saying that offshore structures cannot be used to hide the beneficial ownership of assets for the purposes of tax evasion.

Of course there is some negotiation required before this amendment can come into force but a line has been drawn in the sand: offshore tax abuse is now clearly indicated to be unacceptable. The consequence for the secrecy jurisdictions is unambiguous. Given that this reform will kill a substantial part of their business this is the time for them to accept that reform is essential, or face Armageddon.

30 Responses

I suspect that the Banks will duck out of responsibility for anything other than interest paid by themselves and so they should. The new burdens will fall on the CSPs and TSPs who are the people in a position to know the nature of all receipts and payments into bank accounts. The inevitable result will be overhead increases in those jurisdictions within the ambit of the ESTD and a competitive advantage to those who are not i.e. business will just migrate from the IoM, etc. to elsewhere.

You also seem to be ignoring the ability of those of us who are offshore practitioners to come up with novel solutions which will dodge not only the new ESTD but also the Levin-Coleman-Obama Act and the various TIEAs.

I think you give away the fact that you are located in the Isle of Man by use of the abbreviations CSP and TSP which are, I think, unusual to it and relates to corporate service providers and trust to service providers.

I do not agree with you. I cannot see any reason why this should increase the overhead cost of such organisations, or the banks, who as paying agents will have to comply. If you do not already know your clients then you are in breach of the law. that is the beginning and end of this.

But yes, of course this will mean some business will move elsewhere. We all know that. But in the end tax evaders we’ll run out of places to go to as, one by one, they are picked off.

We are also getting much better at anticipating the actions of people like you. Nowadays legislators listen to people like me, and I’m at least as good at creating innovative solutions as you are – which means I can also tell them apart.

But your reaction tells us one overriding thing – which is confirmation of what we already knew – and that is that financial services operators in the Isle of Man have no commitment to stopping tax evasion, not least because it is the substratum of their livelihood.

I am fairly outraged by the comments of this Mr Keig, who has more or less openly admitted that he is in the sleazy business of pedalling schemes to assist crime in my country. Of course, I have always known that these kihnd of people exist. I also know there are peole who make money out of seelling arms and inflaming wars in third world countries. Nevertheless to actually read the comments of a real preson brings home how for some people money is the sole purpose of their existence. He is right to say that we will all have to work very hard to wipe eople like him of the map. The same can be said about cholera.

You make a totally unwarranted assumption that I am involved in tax evasion – I am not. I certainly do know my Clients – I have to to properly advise them. I am involved with legitimate tax avoidance – I know you are prone to see avoidance and evasion as the same thing but some of us do not. So, as long as, within relevant laws, I and others like me can help clients reduce their tax burdens we will continue to do so.

You really do come across as a terribly arrogant person – we offshore denizens will pit our wits against you and your pals anytime. For your information, we have already figured out how to avoid the Levin-Coleman-Obama Act and the revised ESTD – legally!

Incidentally, why do you equate tax avoidance with immorality? Tax itself is immoral – the fact that it is necessary does not make it moral.

Advocates taxing of interest payments on capital that are almost universally below the rate of inflation… so it’s a tax on capital loses.

Advocates against investing capital in risky stocks which have not performed well and only achieved bonuses for brokers.

So, Richard, how exactly does you believe capital ought to be protected while inactive, particularly in this time of devaluation?

You have mentioned to me that only investment adds value. That approach ignores risk and you would not find Warren Buffett agreeing with you that he should immediately invest all Berkshire Hathaway’s $37 billion in cash.

If you really think tax is immoral I really do doubt your judgement on any other issue.

And as you amply demonstrate – you are making it your job to avoid the EU STD. But its sole task is to stop tax evasion. In that case of course you are involved in tax evasion in that case, for it is solely about reporting income to those authorities who have a right to know it. You are seeking to prevent that – the result is that without doubt you are assisting evasion. No other conclusion is possible.

“Clever Clarke” thinks that he can provide wrappers to his clients. However through his foggy world he omits to mention to his clients that these products inavaribly cost substantially more than the savings withholding taxes, especially if the wrapper contain assets that yield partial interest such as mixed funds. Also these wrappers are financially a disaster when his client wants to change his fixed income assets to equities.

Clever Clark also has no clue that these wrapper products are to be included in an imminent amendment to another EU Directive.

Lastly, Clever Clarke may advise his clients to move their accounts to Singapore, Hong Kong or Dubai. Oh dear, Clever Clarke doesn’t realise that the Savings tax directive is going after branches of banks with their head office in the EU.

Clever Clarke was no doubt one of those promoting Icelandic banks.

Clever Clarke doesn’t realise that the EU Commission tax dept. now has advisers that are as clever, if not more innovative than him and his ilke. People like Clever Clarke have not cottoned onto the fact that Discretionary Trusts and Foundations will not escape the directive because either the true Settlor or Founder is the beneficial owner (not the lawyer setting up teh foundation!) or the Trust / Foundation has the unpleasant choice of being treated as a fund, keeping track of all interest earned and applying the savings tax upon distribution. oh dear!

Good luck Clever Clarke, your type of business has a very limited life.

Is tax immoral? If that is no Mr Keig evidently believes it is immoral for less wealthy people to have access to healthcare. He believes that countries should not protect themselves against invasion. He believes that ordinary people should not have access to education. These are all things which absolutely depend on tax. On the contrary, Mr Keig tax is moral. What is immoral is assisting people to avoid accepting their responsibilities to the society in which they live. I am just an ordinary working guy (albeit in the tax profession). I pay taxes. I have children. Members of my family have health issues. Ordinary people like me are extremely affronted at the arrogance of those who would evidently like to reduce us to penury, ignorance, ill-health and insecurity in order to amass their wealth, wealth earned within the context of the social infrastructure paid for by the responsible tax-paying citizens..

Mark – you should not believe all you read on the internet. The operation you describe is a perfectly legitimate one and has thousands of satisfied customers versus a few people who feel hard done by (some of them bitter and twisted ex-employees). I suggest that you refrain from libellous comments – one day they will land you in trouble.

As regards your puerile response, Clever Clarke knows better than to advise people to use “mass-marketed” products like bond wrappers. These things are always prone to attack because they generate significant loss to the Exchequer. He also relates the amount of his fees to the actual tax saved on receipt of assessment – the client at worst saves nothing and pays no fees.

Clever Clarke also has read the proposed ESTD legislation very carefully (which you clearly have not) and would not bother telling anyone to decamp from one tax haven to another – no point, stay in mainstream high-tax jurisdictions.

Lastly, Mark, Clever Clarke has always regarded trusts and foundations as a waste of time – far too popular with the anti-avoidance legislators and the recipients of excessive attention.

Richard – yes, I do believe tax per se is immoral. The fact that you clearly take the opposite view is equally clearly due to a fundamentally different way of seeing life. The fact raises some very profound questions and I will post again to address these issues because I think they are important. I suspect that our world views may be so different that we could never agree – but who knows, maybe I’ll convert you!

Richard – I have been trying to understand how it is that you, and others, happily equate tax avoidance (legal) with tax evasion (illegal) and see tax as moral rather than immoral. I can only conclude that we hold very different world views.

As I see it there are two fundamental ways of looking at the world – you either believe in the rights to private property or you do not. Certainly the idea that all property should be held in common and “from each according to his means, to each according to his needs” is not only good Marxist theory but (according to Acts) was espoused by the first Christian community in Jerusalem. The fact that Christ (as far as can we can be reasonably sure those words attributed to him in the Gospels are true) advocated the giving away of one’s property was not based on any notion of social justice but rather on the (deluded) view that the Kingdom of God was imminent, he would usher it in and concern for worldly matters in general would simply distract from the urgent task of preparing for God’s Kingdom arriving. This sort of society has been tried and invariably results in disaster. Nevertheless, I suspect that at heart you actually think along these lines because it is then easy to see how you conclude that tax is moral. However, if it is not everyone’s right to so organise their affairs so that the incidence of tax is minimized, what is their right and obligation? Is it to so organise their affairs that their tax bill is maximized? Should they live spartanly and give everything they can away?

If you, like Global Society, believe in the rights to private property then tax is the arbitrary taking away from you of what is rightfully yours by dictat of others (which could be a “democratically elected” government, a dictatorship or whatever). That is immoral.

I accept that if we wish to live in a civilized society then we want and need “the people corporate” i.e. Government to fulfil certain functions and that Government needs to be able to command the necessary resources to do this i.e. raise resources by taxation. Thus taxation is necessary but to then say it is necessarily moral is a non-sequitur – tax is still immoral, even if necessary.

This is when the arguments start. Just what should Government be expected to do – opinions differ. Does a Government do these things efficiently or is it wasteful? What is a reasonable tax charge? How legitimate is the Government? These things and many others will always be in the (relative) eye of the beholder with no absolute rights or wrongs.

I personally cannot help but think that your world view leads to great confusion whereas a view of the right to private property provides a more secure basis for developing a society which works. One aspect is that the fairness of taxes will always be a matter of subjective opinion and avoidance of it will always be with us, because there will never be a time when we all agree. In the same way, anti-avoidance will also be with us always because humans seem to be a species with an inbuilt tendency to try to boss each other around.

There is an ongoing debate on the morality of taxation here without reference to the wider issue of what our failing financial systems needs are.
Clearly Tax Havens have been used by corrupt politicians to hide theft… that’s of no benefit to anyone and Richard is right to point that out.
Where Richard’s arguments, in my opinion go astray is when he promotes taxation of capital and at the same time criticises the risky investments made to try to protect it. If world governments were to stop taxing capital tax havens would disappear. Richard I believe is worried that that capital would be hoarded but obviously banks would simply lend it.
So neither tax havens, nor risky investments would be needed. Capital would never remain entirely stagnant as the returns would only approach inflation and investment would remain more lucrative.
Now, if one doesn’t agree with that view then one has to explain how on earth the US and the UK get out of their pensions hole without and immigration pyramid scheme or suicidal borrowing leading to devaluation of currency.

I suggest you move to Somalia where you will find your libertarian paradise in full swing. No pesky taxes!

But there is plenty of redistribution of wealth going on there – it’s called piracy.

Your greed and callousness is not just wicked. it is a threat to national security. One of the reasons we are suffering from Wahabi fundamentalist terrorism is because many Third World Muslim countries were prevented from having a welfare state by the IMF which ordered Asian and African countries to impose school fees and private health insurance, regardless of how impoverished the parents were.

This left the destitute dependent on tribal networks and religious charities in order to survive.

Guess what happens next? The only way for impoverished parents in Pakistan to get their son an education is to send him to a charitable madrassa funded by the Saudis where he is brainwashed into believing a load of far right misogynist homophobic anti Semitic nonsense.

I remember in the late Nineties when some of us were campaigning for human reforms and a new model of capitalism. When demonstrating peacefully we were laughed at by the likes of you. I remember one particularly obnoxious type saying that the tall towers of the City were not going to fall to any “mob” whatever its grievances.

As for the rights of property, they are not absolute. Property is nothing more (or less) than the right of the citizen to enjoy what is theirs under law. It must be respected by others but it must also respect the rights of others.

Equally for a sovereign state to be legitimate it must respect the sovereignty of other nations. If its core business is based on subverting their democracy by undermining their tax base it can expect responsible governments the world over to take appropriate action

Richard,
Live settlors are fair game, but how does one tax a dead one! No doubt the concept of taxation beyond the grave is attractive to you and those who believe that taxation is unavoidable. And don’t tell us that the liability passes to the beneficiaries, because they don’t always exist.

OP,
Please define responsible governments, since in my experience no such thing exists. Subverting their democracy by undermining their tax base is no worse than raping the developing nations of their natural resources.

When the Settlor is deceased, the Discretionary Trust will be treated as a fund. That means the fund (Trust) must keep track of interest earned and the trust as a Paying Agent will be obliged to apply the savings tax upon distribution to the beneficiaries, just the same as a UCITS (and non-UCITS now)…

Offshore Pirates – your views as expressed in message no. 19 reveal that, like Richard, you are, at heart, a Marxist. Your thought processes must run something like this:

All property should be held in common. “Because of the hardness of their hearts” individuals are permitted, as provided by Law, to acquire (in stipulated permitted ways) the right to sole possession and enjoyment of certain objects, etc. However, at any time or times, any of such property or rights (however much risk and hard work an individual may have undertaken to acquire them) may be re-acquired for the common weal. Thus, everyone works for the benefit of society as a whole and may only retain that which the state permits. Thus, taxation is moral (it is simply giving the community that which rightly belongs to it) and private property is what defined by the State so to be.

This is not the way the world has come to work. I suspect that the vast majority of human beings, if forced to answer the question themselves, would say that private property is an unalienable right and that the State should only take, from necessity and not moral right, that which is needed.

It is obvious that those who are Marxist apologists and those who believe in individual rights are never going to agree – and by the way, your side lost the argument.

“Your greed and callousness is not just wicked. it is a threat to national security. One of the reasons we are suffering from Wahabi fundamentalist terrorism is because many Third World Muslim countries were prevented from having a welfare state by the IMF which ordered Asian and African countries to impose school fees and private health insurance, regardless of how impoverished the parents were.

This left the destitute dependent on tribal networks and religious charities in order to survive.”

Offshore Pirates – just how am I greedy and callous? Gratuitous abuse never does the originator other than harm. Justify your comments and remember, at the very worst, “hate the sin but love the sinner”.

I suppose that the evils which blight so many nations (including many muslim ones) have nothing to do with ruling elites e.g. the Saud family, Mugabe, etc., etc. and the corruption endemic in so many of these places. These countries should take a good look at their own shortcomings and do something about them rather than piteously crying for aid to the wealthier nations to bail them and their backward ways out time and time again.

Sebastian – message no. 17. In referring to the “pensions black hole” you are only referring to a secondary problem which will not be solved unless and until we solve a more fundamental quandary.

In his excellent book “The Future of Money” Bernard Lietaer puts the problem thus – “How can we provide a living to additional billions of people when our technologies make jobless growth a clear possibility?

Finding an answer to this question will underpin not just provisions which can be made for retirees but all our lives.